When you use fundamental analysis in your trading, it can be tricky to know what to look for. After all, there is a wealth of economic data released each week, and plenty of analysis available. This can make it difficult for the time poor, part-time trader to keep abreast of the information they need to make good trading decisions. But the good news is that not all data points need to be followed, nor all research read, in order to have a tradable market model. Instead, we can practice “thin slicing” in our approach to Forex trading analysis.
What is “thin slicing”?
While not the first to use the term, thin slicing was popularised in Malcolm Gladwell’s Blink. Thin slicing is the ability to infer patterns and make decisions from small “slices” of information. For example, marital expert John Gottman could predict within an hour of observing a couple if they would be together 15 years later with a 95% accuracy rate. In trading, thin slicing is useful since we often have to make quick decisions about uncertain events, based on probabilities. A deep study is not always practical, nor does it always increase the likelihood of us getting the direction right, or having a winning trade. Thin slicing allows the trader to maximize their performance for the time spent, and is a very useful tool for the professional or semi-professional alike. Let’s look at what information we may want to “thin slice”.
Key market drivers
When first assessing a pair, it’s important to know the key market drivers. I am not necessarily talking about something specific to a currency, but the key thing that the market is focusing on – whether it’s falling oil prices, a debt crisis in Greece, or the UK leaving the European union. These types of events are going to have implications for all currencies, not just the “home” currency. To get this information, simply look at the headlines on Bloomberg, or any number of Forex reports will give you a summary.
The Golden Age of the Central Banker
In this day and age, central banks dominate the investment landscape. The omnipotent central bank chairperson has the power to move markets with a single uttered word. When thin slicing, this of course means we need to keep our eyes peeled for shifts in central bank sentiment. We don’t need to study meeting notes; all we need to know is one thing – rates. Is the Central Bank:
- In an easing cycle? (lowering interest rates/engaging in QE)
- In a tightening cycle? (raising interest rates/restricting business activity)
- On hold? (comfortable with rates where they are for now)
With this information, we can get a good idea of what currency pairs are going to come under pressure.
Know the market type
Price is an important indicator in and of itself. Experienced traders know that price will often lead the fundamental story. To find out what price is telling you, quickly assess whether the market is bullish, bearish or sideways, and whether it is quiet, normal or volatile by looking at a chart. With this information, you can then employ the correct approach for the current market type. Simple but effective.
Is the economy doing well?
Economic performance, before the golden age of the central banker, used to dictate a great deal of currency moves. It used to be that when you traded currency pairs, you were trading one economy vs. the other. Now it is less so. In saying that, it is still good to have an idea of how well an economy is performing. This does not mean watching every economic report, but just having a sense of how things are going in the economy. This is easily done by reading one or two bank reports a week.
Thin Slicing individual currencies
Once we know the main kinds of stories that drive markets, we can then zero in on specific economies and look at what’s going on behind the helm. Generally speaking, we’re interested in what central banks are doing, how economies are performing, and current market types. There are always other factors at play, some of which will be more specific to the currencies they affect: below are some of the current key drivers of the major currency pairs. This could include geopolitical factors, related markets or whether stocks are being brought or sold. The Euro (EUR)
- Brexit and anti-EU sentiment
- Italian banks
- Debt problems in the peripheral nations
- Immigration
USD
- Upcoming election
- Risk on/risk off in stock markets
- Non-farm payrolls
JPY
- Government debt/monetization
- Risk on/risk off in stock markets
- Value of UsdJpy
GBP
- Brexit Implications
- Inflation
AUD
- China debt/economic performance
- Iron Ore prices
- Gold prices
- Copper prices
- Risk on/risk off in stocks
NZD
- Dairy prices
- China debt/economic performance
- Risk on/risk off in stocks
CHF
- Risk on/risk off in stocks (safe haven status)
- The price of the EURCHF
CAD
- Oil prices
- Risk on/risk off in stocks
Generally, this is what is on my mind when assessing if I want to buy or sell a currency. Notice how important political issues can be throughout Europe, how important commodity prices can be throughout Oceania, and how important risk appetite can be when it comes to USD, CHF and JPY.
Simply use logic
Once you have a clear picture of what is going on, it is simply a matter of using logic. If things look bearish, then usually they are going to be bearish. If they look bullish, then usually they are going to be. Yes – it can be subtler than that on occasion, so it does take practice. You are not always going to be right. But in general: up is up, and down is down (and we have risk management rules for when we get it wrong). If you work to keep abreast of what is relevant, make logical calls, and have the courage to trade them, then you will be alright. Cheers, Sam
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Editors’ Picks
EUR/USD climbs to 10-day highs above 1.0700
EUR/USD gained traction and rose to its highest level in over a week above 1.0700 in the American session on Tuesday. The renewed US Dollar weakness following the disappointing PMI data helps the pair stretch higher.
GBP/USD extends recovery beyond 1.2400 on broad USD weakness
GBP/USD gathered bullish momentum and extended its daily rebound toward 1.2450 in the second half of the day. The US Dollar came under heavy selling pressure after weaker-than-forecast PMI data and fueled the pair's rally.
Gold struggles around $2,325 despite broad US Dollar’s weakness
Gold reversed its direction and rose to the $2,320 area, erasing a large portion of its daily losses in the process. The benchmark 10-year US Treasury bond yield stays in the red below 4.6% following the weak US PMI data and supports XAU/USD.
Here’s why Ondo price hit new ATH amid bearish market outlook Premium
Ondo price shows no signs of slowing down after setting up an all-time high (ATH) at $1.05 on March 31. This development is likely to be followed by a correction and ATH but not necessarily in that order.
Germany’s economic come back
Germany is the sick man of Europe no more. Thanks to its service sector, it now appears that it will exit recession, and the economic future could be bright. The PMI data for April surprised on the upside for Germany, led by the service sector.
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